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Comparative economic systems


Economic systems based on state property. Classifying market economic ... encouraged, but not forced, to fulfill the plan via tax stimulus, credits, etc. ... – PowerPoint PPT presentation

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Title: Comparative economic systems

Comparative economic systems
  • Market systems
  • Libertarians
  • Monetarists
  • Keynesians
  • Industrial policy school
  • Advocates of income policy (price and incomes
  • Non-market systems
  • Indicative planning
  • Directive planning
  • Property, capitalism and socialism
  • Economic systems based on private property
  • Economic systems based on collective property
  • Economic systems based on state property

Classifying market economic systems according to
the extent of government intervention
Libertarians (recently - supplysiders)
  • The state should provide public goods and
    regulate externalities. What are public goods?
    Prisons, post-office, central bank?
  • Frederick Hayek (Road to slavery),
  • Ludwig von Mises (debates with O. Lange)
  • Privatization of the central bank
  • Market economy ltgt democracy
  • private property ltgt civil liberties
  • Gold standard or common world currency (R.
  • Laffer curve (optimal tax rate that maximizes
    budgetary revenues)

Laffer curve the relationship between the
revenues and tax rate
Why government intervention?
  • In classical case, all markets are perfect,
  • Elasticity of wages on demand-supply of labor is
    infinitely high gt supply curve is vertical in
    AS-AD model
  • Elasticity of interest rates on money
    demand-money supply is infinitely high gt LM
    curve is vertical in IS-LM model
  • Keynesian approach markets cannot clear because
    of rigid prices and wages
  • LM curve and AS curve are not
  • Twin deficits budget deficit is accompanied by
    trade balance deficit
  • ? NX(S-I)(TA-G)
  • if SI, then NXTA-G

(No Transcript)
The US never had such a large current account
Why government intervention?
  • Prerequisite for industrial policy not only the
    market mechanisms can guarantee macroeconomic
    equilibrium with full employment, but they also
    fail to allocate properly resources by
    industries, regions and areas of economic
  • Prerequisite for income policy distributions of
    income (wages - profits) is too serious a task to
    be delegated to the market forces

Classifying non-market economic systems
Rationales for central planning
  • The term indicative planning has two meanings
  • a sort of industrial policy (firms are
    encouraged, but not forced, to fulfill the plan
    via tax stimulus, credits, etc.)
  • a variety of central planning (prices, but not
    production quotas) are set by the state
  • Why planning? The market is not perfect in
  • Maintaining equilibrium at full employment
  • Long-term projects
  • Income distribution (windfall profits)
  • Allowing the society to control its own

Types of planning
Directive versus indicative planning in the USSR
Elements of indicative planning and market
mechanisms in the USSR in the 1980s
  • Not all types of goods are subject to production
    quotas (25 million types of products, only about
    1 million aggregated items planned)
  • Collective farm market (2-3 of total retail
    trade turnover, 5 of food sales)
  • Consumer goods market (supply and prices were
    planned, but demand was mostly not planned, i.e.
    no pervasive rationing)
  • Labor market (demand and prices - wage rates -
    were planned, but supply was mostly not planned)
  • After 1965 reform enterprises got the right to
    use part of the profit for paying bonuses, for
    investment into production and residential and
    social construction

Theory of optimal planning
  • Given information
  • Limitations on resources
  • Expenditure (inputs) of each and every type of
    resource needed for production of each product
  • Production targets for some final product
  • Structure of final consumption
  • Goal to select the production levels for all
    resources and final products such that
  • Production of resources is equal to their
    intermediate consumption final consumption
  • The final consumption (with the given structure)
    is maximized

Planning problem
Indicative planning theoretical foundations
  • O. Lange - trial and error method
  • L. Kantorovich - objectively determined
    valuations, or shadow prices, from the dual
    problem of optimal planning
  • Particular set of prices calculated for each
    product in the main problem
  • If profit-maximizing producer is guided by these
    valuations as prices, he will inevitably arrive
    at the previously computed optimal plan from the
    main problem
  • Therefore, society can influence producers
    economically (via setting prices) not
    administratively so that they provide the
    maximum benefit for the entire society

What is the difference between directive and
indicative optimal plan?
  • In theory results are the same
  • In practice the results are inevitably
  • Imagine new technology, that did not exist during
    the preparation of the plan, emerges during the
    planning period
  • Under directive planning this new technology is
    not going to be used (no resources)
  • Under indicative planning, enterprises will have
    a chance to use this technology at the expense of
    taking resources away from other enterprises (so
    the balanced plan will be ruined)
  • Indicative planning is more flexible
  • It is impossible to envisage the emergence of all
    new technologies
  • Unforeseen options, such as new technologies,
    cannot materialize under directive planning

Indicative planning vs. market
  • If shadow prices are adjusted taken into
    account supply/demand deviations (Langes trial
    and error method), then indicative planning
    works as imitation of the market
  • Shadow prices (objectively determined
    valuations) reflect the priorities of
    socioeconomic development set by the planners -
    in the conditions of limited resources and
  • Market prices reflect preferences of all economic

Limitations of central planning
  • Enormous scope of the problem too much
    information to be collected, too complex problem
    to be solved
  • The entire product nomenclature was 25 million
  • All products should be allocated in time and in
  • Hayeks criticism The market as a procedure of
    discovery - all unforeseen production options
    cannot be taken into account before the planning
  • Huge bureaucracy is needed for setting the levels
    of output and/or prices low stimulus for
    managers adjustment is too slow

Classifying economic systems according to types
of property
Market socialism
  • Market socialism market economy collective or
    state property
  • Elements of market socialism in the world
  • Cooperatives in market economies or in CPE
  • Employee participation in management, ownership
    and profit
  • Complete market socialism (Yugoslavia 1965-72)

Cooperative (B. Ward. The Firm in Illyria Market
syndicalism, AER, 1958)
Cooperatives hire less workers than private firms
  • Differentiating net revenues per worker with
    respect to L, we obtain
  • Q(L)zwd

Private firm and the increase in prices of output
Cooperatives reduce employment when price of
output goes up
Private firm increases employment when price of
output goes up
Cooperatives compared to the private firms
  • Advantages of cooperatives
  • Higher labor productivity
  • Less sick leaves
  • Less strikes
  • Lower employee turnover
  • Lower managerial expenses
  • Higher work satisfaction
  • Disadvantages of cooperatives
  • Capital scarcity (as the owner of capital is not
    remunerated fully cooperative may not attract
    capital via selling shares)
  • Use of less capital-intensive technologies
  • Higher debts to assets ratio

Employee participation
  • Employee participation in management boards
  • Profit sharing
  • Participation in equity
  • ESOP Employee stock ownership plans
  • Workplace democracy
  • Pure market socialism
  • Yugoslavia, 1965-72
  • All decisions were made by work collectives,
    while enterprises were state-owned
  • New Economic Policy, 1920s, Russia
  • China, 1990s
  • TVE - township and village enterprises

Justification of workers participation
  • Human capital today is roughly equal to the
    physical capital
  • De-bureaucratization of management in large
    companies (to prevent managers from collusion)
  • In fact,
    non-profit-maximizing firms and organizations
    constitute a substantial share in most economies
    public sector, non-profit organizations,